US Retail Spending (And the Economy) Is Hanging Off The Edge of a Cliff

The state of the US economy is like a fine piece of art — experts say it’s good, but from a consumer’s POV, you really have no idea what you’re looking at. Several major banks, including JPMorgan, have recently raised their outlook on the US economy — even dropping their 2023 recession forecasts.

• Retail sales data has come in strong in recent months — accelerating to a 0.7% rise in July — the fourth consecutive month of growth.
• Amazon’s Prime Day and back-to-school shopping may have juiced up the numbers — which also doesn’t factor in inflation.

Everything is fine, right? …Right?

Earnings paint a different and confusing picture

In the second quarter, four of the five largest US retailers beat Wall Street expectations — the outlier being Target (NYSE:TGT) — which saw sales fall the most in nearly seven years.

But further down the chain, several retailers that reported earnings this week have warned about deteriorating conditions:

• Macy’s (NYSE:M) is down nearly 17% since reporting weak earnings this week — hurt by late credit card payments with consumers “coming under pressure” (RD).
• Foot Locker (NYSE:FL) fell 28% yesterday after lowering its forecast again this year over “consumer softness” — forced to offer sharp markdowns to attract shoppers.

Discount retailers have reported better-than-expected earnings in a sign that shoppers are bargain-hunting. However, high living costs continue to erode purchasing power despite a relatively strong job market.

Troubling data: In the second quarter, new US credit card delinquencies jumped to 7.2% — up from 6.5% in the first quarter and higher than their pre-COVID rate.

While this is still far below the near 14% levels seen during the 2008 financial crisis — the trend is worrying as rating agency Moody’s warned that this number could continue “rising materially.”

Forward-looking: At this point, consumer spending could go either way. And the real test comes in September and October — once school shopping is done and student loan payments restart.